Hermes’ Patel adds: “This credit is not being used to buy oil or iron ore, so the big index names are not going to benefit, but the domestic play where companies are credit sensitive will benefit and have been doing so for a while.”
Performance enhancers
There has been a lot of negative press in Brazil about this expansion of credit. Critics believe the debt levels are becoming unmanageable for vast swathes of the population. People are borrowing more than they can pay back and consumer defaults have reportedly risen by 8% so far this year, this will have an impact on the sectors that have been predicted to benefit from the growth of Brazil’s middle class. However, Patel says he has given problems arising from this scenario a lot of thought and feels it will not be such a big problem.
“If you look at the composition of the debt, a lot of that is consumption debt and it is very short-term in nature. What we’ve noticed is that much has the duration of between 12 to 18 months.”
He adds that there has been a general tightening of credit conditions in Brazil over the last few months and what is being granted now is safer in profile than 12 to 18 months ago. “What was granted 12 months ago has now been paid and no longer outstanding, consumers need to re-apply and we’ve noticed the banks getting tougher,” he adds.
Joining the event
How are funds profiting from the rise of the consumer in Brazil? Hermes – adviser and manager of the BT pension scheme –accesses these stocks directly to take advantage of consumer trends, while being able to cut other stocks when the going gets tough. This is also the case for other large pension funds who will have dedicated emerging market equity teams and portfolios.
However, these companies are not for the weak hearted and will often be volatile. Many investors cite liquidity concerns as one of the biggest problems, but these fears are unfounded as the Bovespa is the largest stock exchange in South America.
Booth also points out that favouring one region over another in the emerging markets is not the way things should be done. However, investors may go specifically into one region when they have a good diverse weighting to other emerging markets. With the favourable consumer story investors will be looking to beef up companies poised to take advantage of this growth.
Finally, most pension funds will gain exposure through dedicated Latam, BRIC or emerging market funds. Brazil currently represents around 13% of the index but many active managers have been cutting their weightings because of the slowdown in China and the big commodity companies on the index. This does not mean managers are negative on Brazil, but are pessimistic on certain companies and many now have a bias towards domestic consumption.
As the developed world wheezes it way out of recessions and low growth, the case for investing in the developing economies, such as Brazil, gets stronger every day. Investors remain cautious because of the volatility still attached to these markets, however they are certain to zoom ahead in the future because of increasing consumer demand and favourable demographics.
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